Checking in with the airport industry: Slower growth, improved financials & commoditisation

This week sees Istanbul become the centre of world's airport community as the joint ACI EUROPE & ACI WORLD Annual Congress and General Assemblies take place on the shore of the Bosphorus, hosted by TAV Airports Holding.

The theme of this year's event is "Dynamic Airport Business Transformation", reflecting on how much the airport industry has changed in the past 10 years. This transformation now includes a stronger focus on business strategy & costs, direct engagement with passengers (thanks to social media and smartphone Apps), increased quality and diversification of revenues. These developments have reinforced airports' status as fully-fledged and competitive businesses, focused on their customers and supporting the economies of their communities. On this occasion, European airport trade body ACI EUROPE addressed the immediate outlook for its 451 strong airport membership spanning 44 countries.

AIR TRAFFIC OUTLOOK

2012 saw a significant weakening in the recovery of air traffic that followed the 2008/2009 Global financial crisis. While overall passenger traffic grew by +1,8% and Europe's airport welcomed a record 1,61 billion passengers, the year saw a progressive slowdown with EU airports starting to lose traffic as of last October. The situation has further deteriorated since the start of 2013, with passenger numbers at EU airports receding by almost -2%. Unsurprisingly, airports in Cyprus, Greece and Spain are recording the sharpest drops in air traffic, although those in the major EU economies of Germany, France and the UK are not immune to recessionary pressures. Meanwhile, traffic at non-EU airports remains extremely dynamic - especially in Turkey, Russia, Norway and Iceland - with passenger traffic growing in excess of +9%.

Olivier Jankovec, Director General of ACI EUROPE commented "Europe is not just about a two-speed aviation market between EU and non-EU countries. There is also a big divide between the larger hubs and the smaller regional airports. The hubs are showing a lot of resilience due to their reliance on intercontinental traffic. Meanwhile, small regional airports are almost exclusively dependent on intra-European demand and they have been the hardest hit by airlines' capacity and route cutting. Overall, 48% of Europe's airports are losing traffic".

With the pace of growth slowing down in the global economy, record unemployment increasingly being recognised as the new 'Eurozone crisis' and no tangible prospects for real improvement in the economy this year, demand for air transport is likely to be stagnant - at best. ACI EUROPE now forecasts for the full year 2013, total passenger traffic growth of just +0.5% and flat growth (0%) for freight traffic.

After nearly two years of constant decline, freight traffic shows no sign of turning around, standing at -1% since January. Apart from continued weakness in industrial output and domestic consumption, the discrepancy between passenger and freight traffic could reflect more structural factors. These may include changing supply chain strategies towards more local production and a less favourable cost/benefit equation for air freight.

ECONOMIC & FINANCIAL PERFORMANCE

42.5% of Europe's airports were loss making in 2012, an improvement over 2009 when almost half of them were reporting losses. This is an impressive achievement, especially since capital costs have increased by a shocking +29% over the same period - translating into more than €2 billion of additional costs, despite lower investments.

The main factor for this improved financial performance primarily rests with the fact that airports actively sought efficiency gains to reduce those costs that they can control - in particular maintenance costs (-29%) and equipment & supplies (-22%) but also staff costs (-9%) and sales & marketing costs (-16%). The resilience of commercial revenues has also helped - especially in retail, real estate and advertising.

Jankovec commented "Airports' obsession with efficiency gains and cost cutting has been instrumental in improving the financial standing of the industry under very difficult trading conditions. This reflects increasing pressures on aeronautical revenues, with charges levied on airlines and passengers leaving the airport industry with nearly €4 billion of unrecovered operating costs alone. But this also reflects increasing pressures from shareholders - with the current environment leading to aligned public and private shareholders when it comes to the desired return on their airport investment."

He added: "Given the extent of the cost reductions achieved, we are going to reach the limits of what can be done to cut costs further. More cutbacks in operating costs will start affecting service levels - and with a decrease of close to €7 billion in planned investments in the next 4 years, capacity and congestion are also going to be an issue."

THE COMMODITISATION OF AIR TRANSPORT CONTINUES

Beyond the current economic crisis, Europe's airports are also facing slower growth prospects in the long-term. As the European aviation market will progressively reach maturity, traffic is expected to grow at a yearly average of just +1.8% up to 2035 - half the growth rate of the last 40 years. Combined with ever increasing competition, high fixed costs and declining yields, airports are bracing for the tough challenge of commoditisation.

Jankovec said "The immediate priority is on de-risking the business - and that naturally comes with much reduced planning horizons. Yet, airports must also keep the focus on long-term challenges if they want to protect their competitive position and provide the connectivity and economic benefits that their communities have come to expect. "